Rural-urban pay difference in the microfinance industry: evidence from developing countries

Purpose: This study examines the rural-urban wage disparity in the microfinance sector, motivated by the increasing urban focus of microfinance institutions (MFIs) and their emphasis on equitable compensation. It aims to test the existence of an urban wage premium and identify its key drivers. Study Design: Using panel data from 1810 MFIs across 111 developing countries (2007–2018), the study employs Fixed Effects Models and System Generalized Method of Moments to analyze average employee salaries, urban versus rural loan distribution, and firm-level metrics like operational self-sufficiency and portfolio quality. Findings: The study confirms a significant urban wage premium, reasonably driven by agglomeration effects, higher cost-of-living adjustments, and greater productivity in urban areas. Larger and financially stable MFIs also offer higher wages, regardless of location. Contributions: This research extends the urban wage premium literature to the microfinance context, incorporating firm-level factors to explain pay disparities. It provides a global perspective on wage inequality within MFIs. Implications: The findings recommend policy interventions to address rural-urban disparities, and future research into employee-level heterogeneity. They also guide practitioners in attracting and retaining talent across markets.